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Law School Case Brief

Graham v. Allis-Chalmers Mfg. Co. - 188 A.2d 125 (Del. 1963)

Rule:

Corporate directors are entitled to rely on the honesty and integrity of their subordinates until something occurs to put them on suspicion that something is wrong. If such occurs and goes unheeded, then liability of the directors might well follow, but absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists. 

Facts:

The corporation and non-director employees pleaded guilty to indictments for price fixing, and the stockholders filed a derivative action to cover damages sustained by the corporation from defendants. The trial court found that the directors were not liable as a matter of law and on appeal, the court affirmed.

Issue:

Were the directors liable as a matter of law?

Answer:

No.

Conclusion:

The Court concluded that the directors did not have actual knowledge of the illegal antitrust activities of employees, and two prior FTC decrees warning of antitrust violations did not give the directors notice of the possibility of future price fixings. Thus, the directors were not liable as a matter of law. The trial court did not abuse its discretion in refusing to subject the corporation to the harassment of an unlimited inspection of records that had no relation to the directors' liability. There was also no abuse of discretion when the trial court refused to order non-appearing defendants to answer certain questions at a deposition because the stockholders could have obtained aid from an out-of-state court to compel those answers.

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